The law of marginal utility is a fundamental economic concept that explains how individuals allocate scarce resources to satisfy unlimited wants. This law states that every unit of a good has its own unique value and is valued separately by the individual. In this chapter, we will explore the law of marginal utility and its implications for the economic decisions made by individuals.
The law of marginal utility holds that each distinct unit of a means is valued separately by individuals. When individuals choose between different means, they do not do so in general categories, but rather they consider specific quantities of each good. For example, when choosing between a steak and bananas, an individual will consider the specific quantity of each good. The subjective value of each unit of a means is ranked on the individual's subjective value scale, which is ordinal, not cardinal.
The distinction between cardinal and ordinal values is important. Cardinal value is a measure that assigns a specific numerical value to the satisfaction of an individual, such as ranking the satisfaction of an experience on a scale from one to ten. Ordinal value, on the other hand, is a ranking of preferences and preferences only, without assigning any specific numerical value. In other words, ordinal values determine the order of preferences, but do not assign any numerical values to them. This distinction is important because ordinal values can be used to rank preferences, but cannot be used to measure how much satisfaction is derived from a good or service, which is important for understanding marginal utility.
Goods are interchangeable if the actor has equal satisfaction with the different means. If the options have unique characteristics, then each unit is unique in the preference scale. Once the actor values each unit of a good distinctly, it is no longer part of the supply of the homogeneous good. For example, three different bananas provide each equal satisfaction, and thus the actor is happy with any one of them.
The first unit of a means will be allocated to the highest value end on the individual's preference scale. The next available unit will be used to satisfy the second-highest end. Each additional unit of means will lead to the satisfaction of lower valuable ends. As the supply of homogeneous means increases, the marginal utility of each additional unit decreases. As the supply of homogeneous means decreases, the marginal utility of each unit increases.
When choosing between units of two goods based on the supply available, the marginal utility is higher for the good which the actor prefers. The marginal utility of a good is the additional utility gained from the consumption of one additional unit of that good. The law of marginal utility is an essential concept for understanding how individuals allocate resources and make economic decisions.
In summary, the law of marginal utility states that each unit of a good has its unique value, and individuals value each unit of a good separately. Goods are interchangeable when the actor has equal satisfaction with the different means. The first unit of a means will be allocated to the highest value end on the individual's preference scale. The marginal utility of a good is higher for the good which the actor prefers. The law of marginal utility is a fundamental economic concept that helps explain how individuals allocate scarce resources to satisfy unlimited wants.
[[Subjective preference scale]] [[Scarcity]] [[Time Preference]]